Draft rules to implement amendments to nullify retrospective applicability of tax on indirect transfer of shares

The Government passed the Taxation Laws (Amendment) Act, 2021 (TLAA) in Parliament on 13 August  2021 to amend the indirect transfer provisions of the Income-tax Act, 1961 (ITA), making them prospective, i.e. from 28 May 2012. The TLAA stipulates certain conditions to be fulfilled by the taxpayers to be eligible for the intended relief, including filing of undertakings by the taxpayers.

In order to implement the said amendments, draft rules have been proposed stipulating the conditions to be fulfilled and the process to be followed.

The significant aspects of the draft rules have been discussed below:

Process to be followed

• The taxpayer (Declarant) to furnish in Form 1 within 45 days from the date of publication of the rules in the official gazette an undertaking in the specified format to the jurisdictional Principal Commissioner or Commissioner (Designated Officer).
• The Designated Officer will either grant a certificate accepting such undertaking, or pass an order not accepting such undertaking, after giving the Declarant an opportunity of being heard, within 15 days from the date of receipt of the said undertaking, in Form 2.
• The Declarant to withdraw, discontinue or waive any proceedings and furnish an Intimation with the Designated Officer in this regard within 60 days in Form 3, from the date of receipt of the certificate in Form 2.

• The Designated Officer to pass an order in Form 4 giving directions to the Tax Officer (TO) to either: - grant the relief to the Declarant, or - not grant the relief to the Declarant, after giving the Declarant an opportunity of being heard, within 30 days of the receipt of Form 3 or within 30 days of the issue of Form 2 (applicable in case the undertaking is furnished as per point B below), as the case may be.

• The TO, within 30 days from the receipt of the directions of the Designated Officer, to undertake the following: - Give effect to the directions of the Designated Officer and pass an order - Issue the refund (if any) - Revoke attachments (if any) - Withdraw department appeals, applications, petitions, proceeding relating to the orders covered in Form 4.

Undertakings to be furnished by the Declarant and the Interested Party[1] (if any)

1. Where any proceedings pertaining to the relevant order[2] are pending as on the date of the undertaking, the Declarant, and the Interested Party (if any), is required to undertake:
   • to irrevocably withdraw, discontinue and not to pursue the said proceedings, and
   • to irrevocably terminate, release, discharge, waive, etc. any existing or future right, claims, demands, liens, costs, etc. arising out of or in any way relating to the imposition of tax, interest and/ or penalty based on the relevant order.
2. Where no proceedings pertaining to the relevant order are pending as on the date of the undertaking, the Declarant, and the Interested Party (if any), is required to undertake that:
   • no proceedings have been initiated and will be initiated, or
   • after initiation of the proceedings, the same have been irrevocably withdrawn and will not initiate in the future.

Other significant aspects to be considered

• The Declarant is required to indemnify, defend and hold harmless the Indian Government and/ or Indian affiliate[3] of all costs and expenses, if a separate interested party (such as shareholders, beneficial owners, officers) of the Declarant asserts, brings, files or maintains any claim against the Republic of India or Indian affiliates at any time after filing the undertaking.
• The Declarant is required to issue a press release announcing the signing of the undertaking.
• Any dispute with respect to any forms or orders or directions issued under the draft rules shall be governed by the Indian laws.

The draft rules stipulate the detailed undertakings to be furnished, and the stepwise process to be followed by the Declarants to be eligible for the intended relief. These draft rules provide clear guidance for both the taxpayers and the tax authorities, which would ensure a time-bound conclusion of the process.

[1] Interested Party shall include all the holding companies in the entire chain of holding, as defined under the Companies Act, 2013, of the Declarant and the persons (including third parties) whose interest may be affected (directly or indirectly) by the undertaking.

[2] Order (including assessment order, rectification order, order deeming a taxpayer in default for not withholding taxes) passed by the income-tax authorities with respect to the income accruing or arising from the indirect transfer of shares undertaken before 28 May 2012.

[3] Indian affiliate means departments, agencies, instrumentalities, public sector companies and other entities of the Republic of India, owned or controlled by any thereof as well as any official, officers, directors, representatives etc. of any thereof, whether in India or outside India.

Last updated: 10/09/2021

Article contributed by:

Mehul Sahni

Senior Manager -  Taxation

Sudhanshu Dixit

Manager - Expatriate Taxation

MBG Corporate Services